Global risk appetite was strong last week and overnight. The price of gold is near its December low while the price of Brent crude oil hit $60 for the first time in a year. The S&P 500 had a five-day winning streak and rose 4.65%, reaching a new all time high of 3894.6 and yet the Dollar trade-weighted index was down only 0.3%. The daily negative correlation between US equities and the Dollar, robust in the past 12 months, broke down more than once last week. The safe-haven Swiss Franc was down 0.6% last week.
US macro data were disappointing. While the ISM non-manufacturing PMI rose in January (for the second consecutive month) by one percentage point, the corresponding figure for the manufacturing sector fell 1.8pp. Moreover, US labour market data in January were soft, with the economy having created only 49,000 jobs. However, the US Senate on Friday morning approved in a hung-vote President Joe Biden’s $1.9 trn coronavirus stimulus package, which further buoyed global risk sentiment. The bill will now go to the House of Representatives where the Democratic Party has a material majority. The US is also making decent progress in its Covid-19 vaccination program.
Risk-sensitive currencies, including Sterling and the Australian and Kiwi Dollars, outperformed. Sterling continued to benefit from the relative success of the United Kingdom’s vaccination program, with 12 million people having so far received at least one dose. Moreover, the Bank of England’s Monetary Policy Council meeting was less dovish than expected at its policy meeting on 4th February. While the Bank of England is preparing the banking sector for the possibility of negative interest rates the MPC sees little chance of this actually happening. The Sterling trade-weighted index ended the week up 0.7% but the GBP/USD cross once again failed to break through the 1.374 level.
The Australian Dollar appreciated 0.8% despite the release of weak Chinese Caixin services PMI and Australian retail sales figures for December (-4.2% mom). The Reserve Bank of Australian kept its policy rate unchanged at a record-low of 0.10% but boosted its QE program by AUD 100bn. The Kiwi Dollar was up 0.4%. New Zealand’s seasonally-adjusted unemployment rate fell to 4.9% in Q4 from 5.3% in Q3, further dampening market expectations that the Reserve Bank of New Zealand will cut its policy rate (0.25%) and fuelling speculation as to when it may be in a position to hike rates.
Conversely, the Euro weakened about 0.8% last week. On 4th February it fell to its weakest level since 22nd July before rebounding slightly on Friday. The slow pace of vaccination in the European Union along with weak Eurozone GDP data for Q4 conspired to weigh on the Euro. GDP growth slowed sharply to -0.7% qoq (based on the preliminary flash estimate) from a record +12.4% qoq in Q3 which compares poorly with the US which recorded growth of about 1% qoq in Q4.
